March 2011 Archives

March 31, 2011

What to do When a Client Won't Pay

The problem of clients refusing to pay their bills on time--or ever--is one that plagues all businesses. And the problem has only gotten worse with the downturn in the economy. When clients don't pay their bills--making it difficult for you to pay your own bills--what is a small business like yours to do?

One option for cash-strapped businesses has always been factoring, or selling outstanding invoices to a third-party investor. But there are downsides. Invoices are often sold for a sharp discount. And the collections process is taken over by the purchaser of the invoice, who most likely doesn't care about retaining good customer relations with your clients.

A company called The Receivables Exchange now offers a twist to the age-old process of factoring, largely remedying those downsides. According to the article "How Small Businesses Can Beat Deadbeats," by Dyan Machan in SmartMoney Magazine, The Receivables Exchange works as follows: You list your unpaid invoices on the exchange, and financial institutions bid on those invoices. The winner of the bid sends you a cash advance (usually 80% to 90% of the value of the invoice, although businesses new to the exchange may receive much less) in return for a monthly payment of one to two percent. You get an immediate infusion of cash--allowing you to pay your bills and keep your business afloat--and the bidder gets what amounts to an 18% annual return on its investment. Businesses who have listed on The Receivables Exchange say they raise more cash through the exchange than with traditional factors, and they retain control over customer contact.

Unlike traditional factoring, the risk of the invoice never getting paid stays with you, the small business owner. You still need to go through the collections process with your client. And if your client never pays up, you'd be on the hook to repay your bidder. But still, The Receivables Exchange can be an attractive option for some small businesses--particularly if they're at risk of becoming deadbeat clients themselves.